Recent, real-estate related court opinions.
Home equity loan interest as a business expense
An owner of a business obtained a home equity loan and used the proceeds to pay off and replace his business debt. The owner paid interest on the debt and treated the amount as an interest expense for a trade or business that reduced his adjusted gross income (AGI), instead of treating the interest as an itemized, home-loan interest, which would be disqualified from his AGI. The Internal Revenue Service (IRS) disallowed the interest paid as a business expense, claiming the interest expense was an itemized, personal deduction since a loan secured by a personal residence was not a trade or business debt. The owner claimed the interest paid was deductible as a business expense since the proceeds from the home equity loan were used to pay off business debt. A Tax Court held the interest expense was deductible as a business expense since the debt was incurred to repay a previous debt and the interest expense was treated in the same manner as the previous debt. [M.D. Alexander, TC Summary Opinion 2006-127]
Editor’s note — A distinction based on after- tax consequences must be made between itemized, personal deductions and trade or business expenses. Once a taxpayer’s AGI exceeds $150,000 (for 2006), his itemized deductions are reduced. However, business expenses are not subject to this reduction in tax benefits as occurs when the write-off is reported as a personal, itemized deduction.